This page is a collection of reflections, contemplations, thoughts; about life, about death, about people, about stock markets, about science, about scientists, about economy, about economists, about art, about artists, about books and authors...

Friday, November 30, 2012

Laxmiamma was a happy soul.
Instead of keeping her savings under the mattress, she had opened up a bank
account and had started a recurring deposit on my insistence. The obligation of
putting aside the money for the deposit every month, made her save more. Also, she
had no choice when tempted to buy unnecessary food or household articles as
there was no money lying around at home to do so. Now she had accumulated
enough money to buy back her jewellery from the jeweller, which she had sold
way back in 2002, when her husband died and she needed some money to tide over
the bad times.

She invited me home to celebrate
the liberation of her jewellery, over a cup of Irani chai and biscuits. While
chit chatting with her about the weather, she told me that she needs to go to the
bank to withdraw some cash the next day. I was surprised. In this day and age,
who goes to the bank to withdraw cash, unless the amount is very large?

On being asked, she said,
"then how else does one withdraw cash?"

Nicky: Haven't you seen ATMs
around?

Laxmiamma: I have heard about
them, but I thought that those are not for people like us. I thought those are
for the rich.

Nicky: Nonsense. It's for
everyone who has an account with the bank.

Laxmiamma: How? And what is an
ATM? I have seen the large box like things around, but don't know how that
shells out cash!

Nicky: An ATM or an Automated
Teller Machine is a machine which counts and gives out the amount of cash that
you want, after ensuring that your bank account has the desired amount. Did you
get a small card when you opened an account?

Laxmiamma: Yes I did. But I just
kept it away safely.

Nicky: That is a Debit Card. The
card carries a unique number, which is linked to your savings account. You can
use this card to withdraw and deposit cash, transfer money to other accounts,
pay your bills, look at your account balance and statement for the last few
transactions, all through the ATM. You can even use this card at shops to pay.
The money will be directly debited to your account, provided you have enough
money in the account. So, you do not need to carry cash with you when you go
shopping. But of course, you can't use it when you shop at smaller
establishments like kirana shops or vegetable carts.

Laxmiamma: Ah see, its of no use
to me then! I don't go to the malls like you.

Nicky: You miss the point. Apart
from shopping, there are so many other uses of debit cards and ATM. You
conveniently ignored that!

Laxmiamma (sheepishly):
Uh...hmmm...I heard. I'll use this card to withdraw cash from now on. But what
about safety? Can anyone with my card withdraw money from my account?

Nicky: No. There will be a 4
digit password given to you from the bank. You need to key in that password for
authenticating the transaction. Also, you can change this password if you want.
Don't share the password with anyone.

Laxmiamma: Ah...I forgot to tell
you about this new recipe for karela burji...you might want to try it out!

Abhi complained: I have been
waiting for you since the past half an hour.

Nicky: You should have called
before coming. I would have told you that I would be in a meeting. Anyways,
tell me how is your new house? I am sorry, I could not come for the house
warming ceremony.

Abhi: The house is good,
comfortable. Actually I am here to discuss the tax implications of buying the
house.

Nicky: What about it?

Abhi: Till last year, I was
claiming Housing Rent Allowance (HRA) deduction under section 10(13A) of the
income tax act. Am I still eligible to claim those?Nicky: How can you? Since you are
living in your own house, you are not paying any rent. So you cannot claim HRA
as a deduction. It is treated as an income for you. But you can claim
deductions for your Equated Monthly Installments (EMIs) on your home loan.Abhi: How?Nicky: The EMI is divided into
the principal component and the interest component. The bank must have sent a
statement to you with this break up. Or they will send it to you, if they
haven't done it yet. The principal component of up to Rs1 Lakh can be claimed
under section 80c and the interest component of up to Rs1.5 Lakhs can be claimed
under section 24b of the income tax act.Abhi: But isn't section 80c the
same section where we claim our life insurance premium and provident fund (EPF)
contributions?Nicky: Yes, you are right. Hence
the benefit of claiming the principal under section 80c is limited. In the
initial years of the EMI payment, the principal component is very small. In the
later years, when the principal component is larger, assuming that your salary
goes up with time, the entire 80c limit may be reached with EPF contributions
and insurance premiums alone.

The interest deductions do help
in saving significant amounts of tax though. If you fall under the 30% tax
bracket and pay more than Rs1.5 lakhs as interest, you end up saving Rs45,000
in taxes.

Abhi: So even if I am not able to
claim the HRA, a home loan still helps me reduce my tax burden.

Nicky: Absolutely. Infact you did
a very good job of buying a house in Hyderabad. A recent research done by
www.arthayantra.com has shown that Hyderabad is one of the most affordable
places to buy a house for a professional.

While
taking a hard look at the evolution of human civilisation one cannot help but
notice how the financial markets indicate our evolution more than anything
else.

To
quote Prof. Niall Ferguson of Harvard University, in his book “The Ascent of
Money”, “financial history is the essential back-story behind all history”.

It
is a well know fact that every bull - bear run is largely correlated with
something major happening in the world.

The
invention of electricity, use of small motors that power home and kitchen
appliances, the advent of television and computers, etc. have all impacted how
financial markets behave. These events have changed how the world is connected
and does business, for good. Today the biggest driver in the way we connect and
do business is social media.

Any
student or practitioner of finance would have come across the term “Efficient
Market Hypothesis (EMH)”. It essentially says that the stock market is
“informationally efficient”, that is, the current prices reflect all the
available information. Flow of information is one of the most important
ingredients in making the markets efficient.

While
EMH is one of the most profound theories in the history of finance, of late, it
is also the most disproved.

The
recent global financial crisis has further raised questions about the
rationality of the EMH. Warren Buffet argues that the preponderance of value
investors among the world’s best money managers rebuts the claim of EMH
proponents.

Similarly,
former Federal Reserve Chairman, Paul Volcker said that it’s “clear that among
the causes of the recent financial crisis was an unjustified faith in rational
expectations [and] market efficiencies”.

In
fact there are many investors who scout for opportunities (read:
inefficiencies) with the changing business environment and capitalise on
information advantage.

Traders
at Wall Street are known to use Flash Trading - which allows certain market
participants to see incoming orders to buy or sell securities very slightly
earlier than the general market participants, typically 30 milliseconds, in
exchange for a fee.

Lately,
some of the major financial institutions are latching onto the fact there might
be something to the information that is available in social networks such as
Facebook, Twitter, Blogging sites, etc.

For
instance, a research done by Bollen et. al. (2011), published in the Journal of
Computational Science, looked at around ten million Tweets posted between March
and December of 2008 to see if the micro blogs could be used to predict the
market.

The
authors sorted the Tweets into different indices – calm, alert, sure, vital,
kind and happy – and compared them to the market. The researchers found that
the calmness index can predict with 87 per cent accuracy whether the Dow Jones
Industrial Average goes up or down for a time horizon between two and six days.

Certain
proprietary terminals have, over the past few years, kept various traders
informed with live new feeds. They, however, have not come close to creating a
way to instantaneously monitor the pulse of the world and observe the stream of
human consciousness. The news regarding the death of Osama Bin Laden first
entered the public sphere through a tweet and a tool called DataMinr was able
to spot this with just 19 tweets on the subject.

The
company then issued a signal to their clients, alerting them to this important
piece of information. It would have been over 20 minutes before that story
appeared on traditional news sites.

Access
to a data stream that can beat traditional media sources by over 20 minutes
requires no explanation as to its value for traders and investors. Speed
matters.

It will
just be an understatement to say that there will be an increasing relation
between social media and finance. Traders and fund managers are relying on
social signs and sentiment analysis to base their decisions on.

There
is no doubt that technologies are improving and challenging the finance and
banking industry. In the language of Analytics, the more data you have the
better your decisions are and better is your competitive advantage. And social
media can do just that.

So
the point to note here is that in this era of Social Networks, it has become
essential for any budding investor to be able to analyse the social data if
she/he wants to “get the pulse of the market”.

Monday, November 19, 2012

This article was originally
published in Postnoon on November 16, 2012

http://postnoon.com/2012/11/16/plan-your-retirement/88192

Why should we plan for our
retirement?, asked an indignant Mr. Mukherjee. "Professor, you don't
understand our Indian culture and values. My son will take care of me when my
wife and I grow old. We are giving him the best possible education, so that
when he starts earning, I can retire in peace. He is a good son. And, I too
save some money every month. My wife runs the household very efficiently".

Prof. Nicky: I agree Mr.
Mukherjee. I am not denying that your son is a good son and your wife is very
efficient. All I am saying is that, why do you want to depend on your son in
your old age? What if he gets a job in another city or another country? Are you
willing to move with him? Do you want to leave all your friends and family
behind, so that your son can take care of you?

Mukherjee: Not at all. I will not
leave Hyderabad. I have lived here all my life. But my son will not take a job
anywhere else. He will take up a job in Hyderabad only.

Prof. Nicky: How can you be so
sure? He may get transferred, he may get a better opportunity somewhere else.
Would you want him to sacrifice all the opportunities for you?

Mukherjee: No I would not like
that. But even if he lives somewhere else, he can still send money for us.

Prof. Nicky: Yes he can. But what
if he finds it difficult? He will have his own family to fend for. Everything
is so expensive now a days. Maintaining two different households may be difficult
for him. Since you are already saving some money every month, all that I am
asking you to do is invest it in a way which will help you lead a better life
during your retirement.

Mukherjee: But even the money
that I am putting aside every month, in a recurring deposit, will be available
to me when I retire. What is the difference between saving and retirement
planning?

Prof. Nicky: Finally you have
asked a relevant question. Saving is good. It gives you returns close to the
prevailing interest rates, whether you put your money in fixed deposits or
recurring deposit. You save what you have left after all your monthly expenses.

On the other hand, retirement
planning determines how much you must invest every month, so that you don't
have to change your lifestyle much after your retire. The planning includes
planning your investments in different asset classes like mutual funds,
insurance, equities, real estate etc., so that you achieve your financial
goals.

Mukherjee: But who will do it for
me? Will you do it?

Prof. Nicky: No, I will not do
it. There are certified financial planners, who will do the planning for you
for a fee. You only need to ensure that you find a good financial planner who
is qualified and experienced.

Mukherjee: There seems to be
merit in what you are saying. Let me think about it!

Monday, November 12, 2012

Diwali is round the corner and
the retailers are trying everything from discounts to promotions to free gifts,
to lure the customers into buying. Gold has a special place in the hearts of
the Indian customers. Buying gold on 'Dhanteras' is considered auspicious and
is a part of our culture. But, apart from heart, the mind also has a role to
play in buying gold. Historically, gold is seen as a hedge against inflation
and less risky than the other asset classes.

In recent times, gold is also
being seen as The Performer! In the past 10 years, gold has given a return of
approximately 18% per annum, and close to 25% per annum over the last five year
period, on a compounded basis. That is much higher than the returns on the
other popular classes of investments, be it equities, debt or mutual funds. So
buying gold not just gratifies the heart, but also the mind.

To tap on this opportunity, Gold
Exchange Traded Funds (ETFs) was introduced on the Indian stock exchanges in
2007. Since then, it has become a very popular product with the current Assets
Under Management (AUM) in Gold ETFs being more than Rs10,000 crores.

Buying gold for investment
purposes, in its physical forms, comes with associated costs like making
charges (jewellery), storage and insurance costs (jewellery, coins, bars) or
risks of theft. These are reduced to zero in the case of gold ETFs, while
giving returns that are very close to the returns of the physical asset, as
each unit of the ETF is equivalent to 1 gram of 99.5% pure Gold. There are
transaction costs but they are very small.

The attractiveness of the fund is
also due to the fact that they are tax efficient. They are not subject to sales
tax, value added tax, securities transactions tax or the wealth tax, which the
physical gold is subject to. The ETFs can also be exchanged for 99.5% pure Gold
when needed, in multiples of 1 kg. The prices at which the transactions take
place are transparent and real time, just like stocks on the stock exchange.

Both NSE and BSE have announced
that they will hold special trading sessions for gold ETFs alone on Sunday,
Dhanteras, November 11th, from 11.00am to 3.30pm. BSE has also announced to
waive off any transaction costs as well on that day. So this Diwali, make a new
beginning, by investing in Gold ETFs. Even if it is only for 1gm of Gold. It's
just a better way of investing in gold.

Here's wishing all the readers a
very happy and prosperous Diwali!

Disclaimer: The author is not associated with any fund house or the
exchanges offering Gold ETFs. The author has not yet invested in Gold through ETFs
but plans to do it this Diwali.

Monday, November 5, 2012

Srikanth was clearly in a bad mood, when I met him outside my office. He was pacing up and down the corridor with a scowl and fists clenched. On seeing me, he smiled faintly. I led him into my office and asked, "what happened? Did you lose a lot of money in the stock market?", for Srikanth was an active investor!

Srikanth: Yes I did. But I would not feel so bad if I had made a wrong call and invested in the wrong stock. I am feeling bad and I am upset because I lost money due to my broker's mistake.

Nicky: Really? How? What happened?

Srikanth: I had placed a sell order for my holdings in a company, through my broker. But the shares were not sold on the same day. In fact they were sold two days later. In those two days, the stock price went down by about 6% and I ended up losing close to Rs20,000/-.

Nicky: Did you ask the broker for a clarification?

Srikanth (annoyed at the question): Of course I did. They said that there were some technical issues.

Nicky: Do you have a record or any documentation relating to when you placed the order?

Srikanth: You are not really helping me by asking these obvious questions. But, to answer you, of course I do. The records will be available in the 'order history' of my account.

Nicky: I am asking you these questions because I have a solution for you. Why don't you complain to the Securities Exchange Board of India (SEBI)? SEBI has a cell dedicated for Investor Assistance and Education (OIAE), which also handles investor grievances. But before you go to them, you must file a complaint with the stock exchange against the broker. If the exchange's response is not satisfactory to you, then you can go to SEBI.

Srikanth: Why should I unnecessarily get into litigation? My money is not going to come back.

Nicky: Well, it might! The stock exchange might pay you from their investor protection fund, or they might instruct the broker to pay you the amount of loss incurred by you. In case the exchange is not able to settle the case and you lodge a complaint with SEBI, then SEBI might get the exchange or the broker to pay to you.

Srikanth (finally getting what I was talking about): But how do I lodge my complain?

Nicky: Now you are asking obvious questions...Complain by writing to them through post, mail, hand deliver your written complaint or talk to them on their toll free number. All these details are available on the SEBI website.